Global tire market gets back on track

Burning rubber

After a torrid period, the tire market is back on track - but it is finding supply of some key chemicals very tight

DESPITE A lack of recovery in consumer spending - and relatively high levels of unemployment in North America - the tire market is on the rise again.

Rex Features

Figures just released by global tire group Pirelli show that the European passenger and light commercial vehicle replacement tire market grew by 14% year on year in April 2010 - and by 10.5% in the year to date. The equivalent figures for the North American market are 13%, and 9.25% to date. At the same time, Japan-based tire maker Bridgestone has just beaten first-quarter (Q1) expectations, and revised its forecast. Meanwhile, US competitor Goodyear has reported a 14% increase in shipments in Q1.

But things were not so upbeat until recently. "Industry-wide, tire sales were down in the past couple of years due to the global recession," says the spokesman. "We sold 167m tires in 2009, against 185m in 2008 - primarily due to lower industry demand in North America and Europe."

And while things have turned a corner, material shortages and price increases are already evident. "Volatility remains in the area of raw materials, with some cost increases expected to exceed 35% in the second half of 2010," he adds.

Others also think 2009 is a year well worth forgetting about.

"I think that 2009 was pretty dreadful," says consultant Paul Ita, of US-based Notch Consulting, who has a special interest in carbon black. "I'd say the tire market was down 25-30% in the first half of the year."

Of course, there have been regional variations in the rise and fall of local tire markets - with China bouncing back much faster than other economies. "India was quite resilient, and China had a downturn in 2008. But in 2009, with other regions in recession, China ended up with 20% growth," says Ita.

He puts this down to domestic demand, arguing that international demand at the time was nonexistent. At the same time, a recent report from the International Institute of Synthetic Rubber Products and the China National Chemical Information Center says that demand for styrene butadiene rubber (SBR) - the main material used to make tires - grew by more than 21% in China in 2009, to reach 1.1m tonnes. The report adds that capacity is expected to swell by another 600,000 tonnes in the next decade.

"I think that 2009 was pretty dreadful. The tire market was down 25-30% in the first half of the year"

Paul Ita, consultant, Notch Consulting

"China is now the largest national tire market - in an industry that grows at 3-4%/year, or 1.5 times GDP," says Ita. "The tire market is quite slow-moving."

So to see 20% growth is a huge surprise, he says - another example of China's "perplexing" nature.

"China's vehicle utilization range is still low compared with countries such as Thailand - so how long can it continue to grow at that rate?" he says.

Elsewhere, demand in North America and Europe began to pick up again in Q3 of the year - fueled, in part, by 'cash for clunkers' programs that encouraged people to trade in their old vehicles.

For carbon black, which relies heavily on the tires market for its business, the recovery took many people by surprise.

"Right now the market's quite tight, particularly in Europe and North America," he says. "In North America, a few carbon black suppliers are still bringing idle units back on line."

PLAYING CATCH-UPSuppliers were cautiously optimistic that demand would be solid, but were fearful of building up excess inventory, which Ita believes was justified under the circumstances.

"I think some tire companies are now scrambling around for raw materials, where six months ago they had piles of the stuff," he says. "With the new demand, we're seeing a frantic need to replenish inventories."

And with the automotive industry still stuck in a low gear, he says the recovery in the replacement market, as consumers have finally realized that they cannot delay replacing old tires any longer, is a key factor.

"The replacement market accounts for two-thirds of tire demand. It keeps a stable base under the original equipment market, and has helped to balance things out."

Supply is also tight for other rubber chemicals, such as butadiene (BD).

"Some people in future expect this to lead to lower derivative production in North America," says Christoph Kalla, head of marketing for the performance butadiene rubbers business unit at German rubber supplier LANXESS. "Some latex production has already been shut down due to butadiene shortages."

BD is a key feedstock in the production of SBR, the main material used to make tires. Recently, BD prices have been on the rise: the European monthly contract price (MCP) for BD was up by nearly 4% for June, to €1,400/tonne ($1,707/tonne). In North America, BD output was up by 23% (to nearly 372,000 tonnes) in Q1, in comparison with last year - but supply has still been very tight.

For Kalla, the tight supply situation can be more important than the price.

"Price is important, but we can pass that on downstream. What's more interesting is the supply and demand of butadiene - which can differ from time to time, and region to region."

The tire market is a critical one for LANXESS: 70% of its performance rubber goes into tires. And while it is a relatively mature and static market, with typical growth rates of 3-4%/year, Kalla believes this could be kick-started with initiatives like the "tire labeling" regulations.

Like the European energy label for electrical equipment, the tire label will use classes ranging from best-performance (green "A" class) to worst (red "G" class). The regulations will affect all tires sold in Europe after November 2012. As well as indicating how much a tire affects fuel efficiency, it will give information about its performance in wet conditions and its external rolling noise in decibels.

"These are things that consumers can relate to," he says. With or without the regulation, major suppliers are already looking to offer added benefits to the consumer: Goodyear says that, in North America, it has added materials such as carbon fiber, Kevlar or volcanic sand to tires, to help improve steering response, durability or grip. And its Goodyear Assurance Fuel Max helps "provide 2,600 miles [4,183km] worth of free gas" over the life of a set of tires.

Kalla says that specialized tires are likely to become more common - with consumers choosing to spend more money on products with specific attributes.

"The tire has become a focus for OEMs [original equipment manufacturers]," he says. "As that happens, there's more money for research - and higher margins from selling differentiated products."

And he says new technologies such as the BioIsoprene tire (see box above) being developed by Goodyear and US-headquartered biosciences company Genencor is likely to gain ground.

"This kind of thing could help the tire industry to reduce its carbon emissions and energy consumption," he says. "Being green is one of the big trends."

And while many chemicals used in tires are synthetic - and likely to remain that way - the quest for natural alternatives will continue.

"With increases in the price of oil, and of natural rubber, you'll hear more and more about these types of alternative material," he says.

GREEN TIRES ON THE ROADA revolution is ready to hit the tires market, as global manufacturer Goodyear looks to source isoprene - the monomer that it uses to make synthetic rubber - from renewable sources, rather than oil.

Working in collaboration with US-headquartered Genencor (part of Danish food giant Danisco), it hopes to have a commercial supply of isoprene derived from renewable resources within five years. Genencor calls this BioIsoprene, and will make it by fermenting natural substances using specially designed enzymes.

The two companies showed off a demonstration tire at the Copenhagen environment summit in December 2009, which was made from some of the first batch of BioIsoprene produced by Genencor.

"In the future we're looking to use BioIsoprene to make polyisoprene - which would be chemically equivalent to what we have today," says Jesse Roeck, head of global materials science at Goodyear. "This would help us to decouple from oil, in terms of both supply and price."

Feedstock issues are well known, he says: crackers in North America have gone to lighter and lighter feedstocks, so some raw materials have been in short supply. Goodyear's output of polyisoprenes - which it calls Natsyn - is around 90,000 tonnes/year, which Roeck says "could all be made from BioIsoprene."

Genencor believes that BioIsoprene's contribution will be to smooth out price volatility in the isoprene supply chain.

"Oil and isoprene prices are linked," says Rich LaDuca, senior director of business development at Genencor.

Genencor is at the pre-pilot stage of production. LaDuca expects to decide in early 2011 on the location of a pilot plant before settling on a location for a commercial plant.

The company is likely to produce several generations of BioIsoprene, with each one improving on the preceding one. The first generation BioIsoprene will be made from "a starch-based feedstock," and Genencor is looking at a number of options. A second-generation product is likely to use a biomass-based feedstock, says LaDuca.

"We have a compelling technology, but we will need to have a cost-competitive product," he says. "We must aspire to be low cost. People will not buy it just because it's sustainable."

In Genencor's process, the isoprene is produced in the gas phase, which simplifies the purification process.

"If it was produced in the liquid phase, the purification would be much more difficult," he says.